Why do African countries export cotton and copper rather than textiles and mobile phones?

What has been lacking in African economic and policy choices, and what has gone right elsewhere, that would result in higher-skilled and higher-income generating economic activities?

Industrial policy, a taboo issue during the past three decades of economic thinking, has started to make a strong re-emergence in the strategies of developed and developing countries alike. While industrial development has been on the agenda for African states since independence, it is now particularly relevant in the wake of the global financial crisis. Despite an impressive 6% rate of economic growth across Africa for over a decade, such growth has been largely reliant the export of low-value commodities which face volatile price and demand fluctuations. Growth of industry is viewed as a means to increase overall employment, raise incomes and produce goods which are less vulnerable to external shocks[1].

A Chequered History. Africa has had a chequered history with industry, ranging from a post-independence focus on import-substitution-industrialization (ISI) for industrial development, to the nearly complete withdrawal of state support to industry under Structural Transformation Programmes and the exclusion of productive economic investment from more recent focus on human and social development. National efforts to improve, for example, the enrollment rates in primary education, do little to enhance the skills for productive employment and income generation of their citizens. Today, Africa accounts for only 2% of global manufacturing value added, roughly the same proportion it accounted for two decades ago.[2] In this light, policy makers have identified structural transformation as a means to improve economic productivity and self-sufficiency, providing more income-generating opportunities for their citizens.

What Industry? But given the recognition of the importance of industrial development for sustained economic growth and job creation, one must ask what exactly is defined as ‘industry’, and how can African states learn from past successes and failures in this sector? Currently two clear schools of thought are emerging regarding how countries with low hard and soft infrastructure can engage in industrial development.

Bank On Your Resources. The first strategy involves value addition based on natural resource endowments. For example, rather than exporting raw coffee or cacao beans, countries should invest in the roasting of coffee beans and processing of chocolate, in order to earn a greater return on higher-value exports. Key hindrances faced in value addition include human and physical capital investments, and patent restrictions and fierce international competition from established multi national corporations (MNCs). Few countries have been able to negotiate strongly with partner countries and MNCs in order to bring higher segments of the value chain to Africa – Botswana does stand out as a country that successfully bargained to have diamond cutting and polishing undertaken in-country rather than abroad, but in general external economic powers benefit too greatly from cheap raw material goods exported from Africa to allow such value addition to take place in the continent. A value-addition strategy follows a modified comparative advantage approach, that natural assets should be utilized in the short-run to build competitive and diversified capabilities for the long-run. However, criticism has pointed out the continued dependency such strategies will place on commodities, and the limited linkages and spillover effects from resource-based manufacturing to the rest of the economy.

Move Into Low-Skills Manufacturing. The second general proposed industrialization strategy involves moving into low-skilled light manufacturing. The World Bank estimates that East Asia and China in particular will lose low-skilled manufacturing jobs due to increasing wage costs, and Africa may aim to attract more than five million of these jobs due to its low-cost, high-growth environment. Successes in this can already be seen in the establishing of shoe factories by Chinese firms in Ethiopia, and a focus on the domestic production of previously imported industrial inputs (cement, fertilizers etc.) in Uganda. Again, human and physical capital present significant barriers in this regard, as does the continent’s infrastructure deficit. MNCs dominate these manufacturing sectors as well and would need to facilitate much knowledge spillover to enable new manufacturing pursuits in Africa. Financing such industrialization also presents challenges – the attempted jump to manufacturing after independence in the 1960s and 70s was extremely costly, and the industries that were established under ISI were uncompetitive.

Time to Implement. Whatever paradigm African States choose to follow regarding industrial development, there is now a consensus that concerted state intervention is necessary to move to the production, and eventually export, of goods that will have strong benefits for the country as a whole[3]. Strong political will is necessary in order to identify and implement strategies in this regard. While many governments have expressed their commitment to industrialization and structural transformation, significant political capital is necessary to re-distribute resource and primary commodity rents towards more productive activities. And the application of external assistance towards productive capacity, rather than simply towards externally-conceived development targets and extractive economic activities, will assist in providing the investment necessary for such a transformation of Africa’s economies.

[1] UNECA (2011). Industrial Policies for the Structural Transformation of African Economies: Options and Best Practices. Policy Research Paper.

[2] UNIDO, UNCTAD (2011). Economic Development in Africa Report 2011: Fostering Industrial Development in Africa in the New Global Environment.